Why IBM Stock Could Keep Soaring

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The first three months of 2019 have been kind to shares of International Business Machines (NYSE: IBM). The stock lost about 25% of it value in 2018 after being dragged down by the brutal stock market sell-off late in the year, but those losses have now been mostly erased. IBM stock has soared about 24% year to date.

Are more gains ahead for this century-old tech giant? It's impossible to know for sure, but there's one reason to believe that the stock could just be getting started.

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The world is going multi-cloud

While IBM was not a first mover in the public cloud infrastructure market that's now dominated by Amazon Web Services, the company realized early on that large organizations with vast and complex IT operations wouldn't be moving wholesale to a single public cloud provider. So instead of focusing on selling commodity compute resources, IBM positioned itself to help its clients move to and manage hybrid, multi-cloud environments.

IBM's $34 billion acquisition of Red Hat represents a doubling down on this strategy. "The acquisition of Red Hat is a game-changer. It changes everything about the cloud market," said IBM CEO Ginni Rometty in the press release announcing the deal. Rometty sees the acquisition fueling IBM's hybrid cloud business, making it the no. 1 provider in what the company expects to become a $1 trillion market.

Evidence is mounting that IBM's view of the cloud computing market is the right one, or at least that other companies are starting to agree. Networking giant Cisco Systems, for example, has based its cloud strategy on the idea that many companies won't adopt a single cloud platform. "People talked about cloud in the beginning like they were just going to move to a different neighborhood. Like they could just move everything to one cloud, and it would be very simple," Cisco's senior vice president of cloud platforms and solutions, Kip Compton, told CRN.

But it's not simple. For one, some companies face regulatory requirements that require certain workloads to live on-premises. Another issue is cost. Public cloud infrastructure can be cheaper than on-premise hardware in some cases, but certainly not in all cases. "[F]our or five years ago, there was this race to the cloud because it was assumed to be cheaper, easier, and faster. ... I think customers right now are rationalizing where is it really true and where it is perhaps not working for them," Cisco CEO Chuck Robbins told CRN.

Public cloud leaders AWS and Microsoft Azure are also pushing into hybrid cloud. AWS offers Outposts, a product that lets customers run workloads in private data centers, while Azure has its own set of hybrid cloud solutions.

A mix of on-premise hardware and multiple public clouds introduces complexity, and IBM is in the business of wrangling complexity and solving problems for its customers. The company may have been late to cloud computing, but it plans to be a driving force behind the evolution of the cloud computing market. If all goes according to plan, IBM's cloud business will drive its revenue, earnings, and stock price higher in the coming years.

A beaten-down valuation

IBM's cloud business is a long-term growth engine, but the market isn't buying the story. Even after surging this year, shares of IBM trade for just 10 times the company's guidance for 2019 adjusted earnings per share.

To be fair, some concerns about IBM are justified. While the cloud business has been growing, many legacy businesses have been shrinking. Overall revenue has been trending downward for years, and a return to growth last year was short-lived.

But the pieces are in place for IBM to return to consistent, sustainable growth. Beyond cloud computing, the company's blockchain initiatives, including a cross-border payments platform based on the emerging technology, could turn into something big down the road. And IBM is a leader in fast-growing areas including artificial intelligence and cybersecurity.

While a depressed valuation won't push the stock price higher on its own, it does make the upside much larger if IBM's multi-cloud strategy pays off.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Timothy Green owns shares of Cisco Systems and IBM. The Motley Fool owns shares of and recommends Amazon and Microsoft. The Motley Fool is short shares of IBM. The Motley Fool has a disclosure policy.